SEC may force Facebook public

Facebook is under fresh scrutiny about when it might take – or be forced to take – the social networking company public following a fresh $US500 million round of investment led by Goldman Sachs that has valued Facebook at $US50 billion.

Joined by the Russian tech investment firm Digital Sky, which put $US50 million into the deal, Goldman has structured it as a new investment product. Clients can buy a chunk of Facebook equity by investing at least $US2 million, and must agree not to sell shares until 2013 and not to trade in secondary stockmarkets.

It is a deal that has prompted scrutiny of the rules on US initial public offerings. The Securities and Exchange Commission stipulates that firms with more than 499 shareholders must go public, though Facebook won an exemption from this ruling in November 2008 by saying most of its shareholders were staff.

Outside Facebook, though, nobody knows for sure how many investors it has. That has not stopped analysts poring over SEC rules, saying they specifically state that organisations cannot create entities – or “special purpose vehicles" – to circumvent the 499-shareholder threshold. This prompted speculation that the SEC will eventually demand that Facebook register as a public company, four months after the end of its fiscal year, May 2012, a situation similar to that forced on Google in 2004.

Already the SEC is asking questions about hyperactive Facebook activity on secondary markets, which facilitate trading in shares of unlisted companies. These markets had already seen the use of special purpose vehicles, allowing smaller investors to club together to buy Facebook stock. Trading accelerated in November after Facebook’s largest venture capital investor, Accel Partners, sold about a fifth of its 10 per cent stake to give Facebook a reported valuation of $US35 billion.

One secondary stock exchange, SecondMarket, confirmed this week that it had received a letter of inquiry from the SEC. The 500-shareholder rule was introduced in the 1930s to ensure that the public had access to crucial financial information before investing.

“These investors won’t be throwing their money in on trust alone," said Anthony Miller, managing partner of analysts Tech Market View, who said the size of the Goldman investment had echoes of the dotcom boom.

“Though we haven’t heard numbers for profitability or cash flow, we know the animal works, and that it’s a market­defining proposition. For an implied valuation to reach one- fifth of the value of Microsoft shows how much the investors believe in it, and no one puts money in unless there’s a good chance of making that back many times over."

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Company Profile

The company’s principal shareholders are led by founder and chief executive
Mark Zuckerberg
, who holds about 24 per cent. About 30 per cent is owned by staff of Facebook, and individual investors who include LinkedIn founder Reid Hoffman and US Senator Barbara Boxer.

The highest-profile investor is U2 frontman
Bono
. His investment firm, Elevation Partners, bought 1.5 per cent of the firm for $US210 million, which has now quadrupled in value.